Monday, November 30, 2009

News flash: My interview with Richard Metzger at Dangerous Minds is now available for viewing. (And yes, I know I look old...give a 55-year old a break!)

From Dubai to the U.S. healthcare "reform" debate, a key context is the State's Grand Failure to limit the concentrations of power which then twist all State policies to meet the demands of self-serving Elites.

While much is made of the "balance of powers" in the U.S. and other democracies--the power of the executive branch being offset by the legislative and judicial branches--this "balance" completely failed to hinder the credit/housing bubble and the structural fraud and embezzlement at its heart. No branch of the "balanced powers of the State" saw any reason to interfere with the systemic looting and debauchery of credit and currency.

We should also note that in previous periods of extreme concentrations of wealth and high inequality, the "balanced powers" of the U.S. government did not reverse or even seriously challenge these long periods of high inequality. In this sense we should be careful not to overestimate the State's control over wealth concentration and rising inequality.

Despite the supposedly "leveling influence" of income taxes, wealth has become ever more concentrated in the past 40 years, paralleling the high inequality between the Civil War and the Great Depression. Neither the "trust-busting" actions of the Federal government in the early 1900s nor the rise of industrial unions reversed or disrupted the 1860-1930 period of high wealth concentration/high inequality.

This, then, is the grand failure of government: due to the concentrations of power accumulated by those with asymmetric stakes in the game, any attempt to limit a concentration of power is thwarted by status quo. All the issues which so worried Madison in The Federalist Papers have come to full flower: the power of the State has been legally channeled into Elites which have nothing to fear from any branch of the State because they are the State.

Despite decades of attempted electoral "reform," elections in the U.S. grow ever more prohibitively expensive, and it is still legal to contribute large sums of money to politicians. The cliche has it that "money is the mothers' milk of politics" and as has been noted above, it is far cheaper to buy a legislative loophole than it is to pay taxes, build treatment plants, relinquish monopoly, etc.

These concentrations of financial and thus political power flow ontologically from the concentrations of capital and labor that were necessary to industrial production.

The model of a "factory" mass-producing goods, so successful in manufacture, has been applied, consciously or unconsciously, to fields of endeavor which are structurally quite different from manufacture--education, for instance, with the mixed results one would expect of misapplied models.

The human mind's power comes from understanding models and applying them to new situations. In the long view, it is understandable that just as Newtonian physics sparked a frenzy of misapplied models (the human being understood as a mechanical device like a clock, etc.), so too would the highly successful model of concentrated mass-production be earnestly and enthusiastically misapplied.

This concentration of materials, machinery, transport, labor and capital--the factory and the industrial corporation--naturally led to a concentration of organized labor, a model which, now that industrial production has faded, has been misapplied to the last outsized concentration of labor: government.

With no real restraints on government largesse, then public-union labor has concentrated its political power and "won" (I use quotation marks because there has never been any real negative feedback to its concentration of power) stupendous benefits and wages which have created the "upper-caste" I have described above: a protected class of technocrats/apparatchiks who are compensated at two or three times (when pension and healthcare benefits are included) the market rates earned by their lower-caste private-sector brethren.

Once financial and political power has become concentrated into monopoly-capital cartels and State fiefdoms, then those Elites hold highly asymmetric stakes in the game: they have so much more to gain and lose from the political distribution of taxes and exemptions from regulation than non-Elites that they will fiercely deploy all their power and wealth to preserve and extend their share of the national income.

In contrast, the non-Elite citizenry have vanishingly modest stakes in the regulatory and tax-distribution games; while a narrowly focused tax law will enrich an Elite for decades to come, the consequences to the broad non-Elite citizenry are so diffused as to be akin to the brush of a feather.

Immense State/Elite empires have been constructed from initially modest taxes collected from tens of millions of non-Elites--Medicare, for example--while seemingly minor tax laws have enabled vast empires of private capital to solidify. For example, energy, where fortunes have been built on depletion allowances and other tax schemes far more favorable than those awarded to manufacturers, and real estate, where depreciation hides vast rivers of income behind the perverse idea that a building rising in real value is magically declining in worth.

From its humble tax-funded beginnings, Medicare has grown into a stupendously profitable empire which will soon exceed both the military-intelligence complex (the Pentagon) and the Social Security system in budget. This vast empire is comprised of loosely allied fiefdoms (the A.M.A.,trial lawyers, pharmaceutical, insurance and hospital industries, etc.), each eager to defend its turf from non-Elite interference and the encroachment of the other fiefdoms.

The State's technocrats/apparatchiks have gained income and power along with their private-sector partners, and thus rather than provide a negative feedback counterforce to this concentration of wealth and income, the State is in effect a positive feedback, furthering the concentration of wealth and power into Elite hands.

State Monopolies: Violence, Conscription, Taxation and Inflation

The State itself of course holds monopolies on a handful of powers that are concentrated indeed: the dispensation of "legitimate" violence, the power to conscript citizens to fight wars (legally declared or otherwise), the power to tax the citizenry and lastly, the terrible power to rob the citizenry by means of inflation and/or currency devaluation, what I term theft by other means.

Economist John Maynard Keynes quipped, "By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens." This is theft by other means.

Why does the State seek to steal its citizens' wealth via inflation? The politics of inflation dictate it:

1. Politicians need to distribute swag ("free money") to the electorate every two years. Their perspective is thus necessarily short-term as no politician dares care what transpires a decade or two hence.

As a result, politicians must favor inflation, which enables them to borrow/print money and distribute it as swag to voters and Elites ("special interests") in the present and pay interest on the new debt with "cheaper" future dollars.

2. Voters possess the built-in human bias for present gain over future gain. Thus future insolvency is meaningless to those demanding State largesse in the present.

Indeed, politicians have noted that those who demand sacrifice in the present to address a long-term crisis lose elections while those who distribute swag while ignoring the gathering storm on the horizon win elections.

3. Inflation is thus "good" for politicians and the State as it enables paying off obligations assumed in the present with devalued future currency. But is it "good" for the voters who actually earn income? Is a policy which robs a third of your money every decade a worthy policy? For that is precisely what "low" inflation of 2.5-3% annually does: it reduces your dollars' values by a third every decade.

Will the swag "given" to you (is it "given" when it's your own future earnings?) now in the form of government benefits and tax cuts add up to more than a third of your future earnings over a decade? Unlikely, to say the least.

4. So politicians exploit the human bias for short-term gain even as they rob the taxpayers via inflation over the long term. Inflation is tolerable as long as you're a wage earner and your income rises at the same rate as inflation.

But income from labor (wages/salaries) have been flat since the early 70s for most Americans, and so inflation has only been "good" for those holding assets which have risen more or less in lockstep with inflation.

For those whose earnings rise nominally by 15% a decade while inflation robs 30% of their purchasing power, then "a little inflation" is a long-term disaster.

5. The usual argument in favor of inflation is debt-based. That is, inflation is wonderful because it enable us to pay off our debts with future "cheaper" dollars. But if our incomes are being robbed by inflation, then is that "benefit" of inflation really so valuable? If I lose a third of my purchasing power in a decade does being able to pay down my mortgage with depreciated dollars offset my loss of purchasing power? No--unless my mortgage payment exceeds my income by a fair margin, which is essentially impossible.

6. Deflation is excellent for those with cash and earnings and awful for kleptocracy governments and those with over-leveraged debt. The entire idea that "inflation is good" masks a perverse incentive: take on as much debt as you possibly can because interest will become "cheaper" to pay in the future (assuming your earnings keep up with inflation).

If your earnings don't keep up with inflation, well, too bad.

7. The government's "earnings" are tax revenues. As profits and incomes have fallen, so have tax revenues. So as the purchasing power of its taxpayers' wages are stolen via inflation--"theft by other means"--then the State's ability to collect ever-larger sums of money via taxes is crimped. Unless, of course, the government can create asset bubbles via loose credit and unlimited liquidity which then generate huge capital gains which can then be taxed.

8. To enable distribution of swag to voters and Elites, the State kleptocracy offloads the payments into the future. By creating inflation then the State guarantees (or so it reckons) that it will be able to pay the interest on that debt with "cheaper" money collected from taxpayers in the future.

But as taxpayers find the purchasing power of their earnings declining (theft by other means) then they respond to the incentives presented by the government: borrow to the hilt and speculate in asset bubbles as the only way left to maintain purchasing power.

This dependence by both State and citizenry on asset bubbles to maintain purchasing power leads to over-leverage and over-indebtedness which then leads inevitably to a collapse of asset values (which were based on exponential credit expansion) and the tax revenues which were dependent on asset bubbles.

Now the taxpayers find their post-bubble assets decimated and their purchasing power diminished while government finds its tax revenue base has been gutted. Paying interest on all that debt while distributing unlimited swag was predicated on rising tax revenues. That plan has now been revealed as fantasy.

Interestingly, the original Constitution did not explicitly grant powers of conscription or monetary debasement. Yet the vaunted "balance of powers" has not impeded the State from concentrating monetary powers in order to reward Elites and steal not just from its present citizens but from its future citizens.

But even the State cannot control the cycle of over-indebtedness, collapsing asset values and the impoverishment of its people via inflation. The end-state is insolvency, and as the State's monopolies fail to sustain the status quo then its various Elites will battle each other for the remaining spoils: what I term internecine conflict between protected fiefdoms.

Wednesday, November 25, 2009

Thanks to you, readers and contributors, I have much to be thankful for.

To all who took the time to give me encouragement via words and financial contributions-- thank you very much. Once I return to a broadband connection I will thank each of you individually. Until then, please accept this expression of gratitude in the spirit of Thanksgiving.

As longtime readers know, this blog is highly dependent on readers for content, topics and inspiration. It is truly "of two minds"--yours and mine, with the understanding that I merely add to/organize what readers provide.

I have to say that the many emails I have received the past week have reawakened my purpose--to present the coming Transformation/collapse of the debt-dependent, consumerist status quo as a positive rather than a negative transformation (as if opting out of debt-serfdom could be negative).

It is only negative to the Power Elites who will find their share of the national/global income and political power diminished. For the rest of us, no matter how jarring and uncomfortable the Transformation may be at first, it is fundamentally positive in being much more sustainable, much healthier and much less of a burden to our children and grandchildren--something the wildly misguided pundits like Paul Krugman never mention ("go ahead and borrow and blow another trillion dollars or even 10 trillion to keep the consumerist debt machine cranking--we don't care about anything but next quarter's GDP being 'positive' (whatever ills are masked we don't care, just as long as it's a carefully manipulated 'positive number.'")

I am honored and humbled by your encouragement, and I feel the project you are supporting-- a positive, grounded, non-propaganda view of the future--is worthy of all the effort I can devote to it.

For that I am profoundly thankful.

This Thanksgiving, I will be thinking of all the citizens serving in the U.S. Armed Forces posted in distant lands. I honor their service even as I question the politics that has placed them in harm's way far from the homeland. Each uniformed person deserves our thoughts and gratitude this Thanksgiving, and for those uniformed and retired service members who read this blog--and there are many-- thank you for your service. We need your involvement in the body politic to ground the American people in what is being done in their name and with their money.

The general context is well-presented in this WSJ.com story. stripped of the usual angst--"who could have seen this coming?" etc.-- CRE is just another bubble inflated by liquidity, leverage and la-la land cash flow projections that has finally blown up. Prices are down 40% from their peaks and vacancies are soaring.

Very few analysts seem to have pondered the consequences of the CRE implosion, other than to note losses will be at least $500 billion. We should recall that consensus estimates of residential real estate losses were laughably low, as were estimates of jobs expected to be lost in this recession-- 2.3 million versus the reality of 7.3 million plus millions more full-time positions cut to part-time. That's more than three times the standard-issue financial pundits' projections.

So why would their estimates of CRE losses be any more realistic than their estimates for residential and job losses? Thus we can anticipate (just on general principle) that estimates of losses are gross underestimates of what will actually transpire.

It seems "obvious" that one likely outcome of horrific losses to owners and banks in the CRE implosion is a return to recession--the dreaded "double-dip recession." I have sketched out how the dominoes might fall in this graphic:

The Fed's balance sheet already exceeds $2 trillion, Treasury is selling nearly $2 trillion in bonds every year (to finance $1.5 trillion deficits and Treasuries which must be rolled over), the government and Fed have already spent $1.2 trillion propping up the residential mortgage market (99% Federal government guaranteed/underwritten) and countless billions bailing out Fannie, Freddie, AIG, etc. etc. etc.

Does anyone seriously believe the public and bond market will welcome another trillion-dollar bailout of banks and corporations which made visibly risky overleveraged bets on absurdly overpriced CRE properties?

If gthe bond market doesn't puke at the prospect of another $1 trillion borrowed and thrown down the black hole of "saving our financial system" (barf), then the public may well finally step up to the plate.

The prospect of more job losses is sobering, mind-numbing, and terrible. Yet as I noted earlier this week, the reality is the economy has millions of jobs which are hanging by threads due to declining income, revenues and spending. Most of these jobs are retail or white-collar positions which will directly impact CRE. As stores close, the owners are stiuck with zero cash flow and very few prospects for new tenants. As businesses downsize, they move to smaller offices and leave the owners with more inventory.

The ultimate losers of the $1 trillion will be the banks which lent $230 million for properties supposedly worth $250 million at the top which are now worth $125 million at best.

How many banks will fold as CRE implodes? the number is unknown, but what we do know is there will be increasingly shrill demands for a "new bailout of troibled banks" and that the taxpayer will be the source of the money--via another trillion dollars borrowed and blown by the Federal government and the Fed.

The current optimism is based on the idea that "the worst is over." As CRE melts down and hundreds of billions of losses are accrued, as more banks fold, as the government rushes to bail out more players who deserve to be liquidated, then the fragile psychology will reverse.

From its headquarters in a modest office park outside Sunnyvale, Calif., Bridgelux is hoping to spark a revolution in light fixtures for homes and offices across the U.S. It's ready to ramp up production of tiny light-emitting chips that blaze as bright as some incandescent bulbs but consume a fraction of the energy. To meet surging orders for its chips, it's prepared to spend $250 million over three years on gleaming cleanrooms. The question is, where should it put its plants?

For a host of strategic reasons, Bridgelux would like to keep manufacturing in the U.S., but financial realities point to Asia. Not only are taxes far lower and government incentives more generous in such nations as Malaysia, China, and Singapore, but it's easier to raise cheap funding offshore than in the U.S., where private investors frown on manufacturing and bank lending is nearly frozen. CEO Mark Swoboda calls the decision "the toughest challenge facing our company."

Take a look at this chart from the article. In a period of non-financial-based prosperity, the late 1990s, then manufacturing growth clearly powered the economy's expansion.

As unbelievable as it sounds now, 3COM modems and other gear were manufactured in the midwest in 1997.

The "prosperity" of the 2000s was clearly not led by making anything; it was all financial gaming, leverage, and speculation. This chart tells the story:

There are several fundamental reasons why an export-led recovery is unfortunately a fantasy.

1. Where does Washington think our foreign customers will get the money to buy manufactured goods from us? The major trading blocs/nations--the EU, Japan, China and Southeast Asia--are all merchantilist economies--they all depend on selling to us (consumers of last resort) to generate their national surplus income.

If we slash our purchases of their goods, their economies go into a tailspin and their residents won't have surplus income to buy anyone else's goods--or their own. This is the fundamental flaw in the endlessly repeated canard that "these exporting nations need to encourage their own domestic consumption." Yeah, and how do they do that? By firing all the people making stuff for export to the U.S.? Without exports, their national surplus vanishes and their people lose jobs and income. That is hardly the foundation for "more domestic consumption."

The only way we can hope to pursue the same model as all our global competitors is to devalue the dollar to such a degree that U.S.-made goods (priced in other currencies) will be so incredibly cheap that non-U.S. buyers will be compelled to buy U.S. goods by price alone.

But if the dollar falls in half, then our imports of all those nations' goods will also collapse, pushing their economies into deep recession. It is indeed a conundrum: if we cut imports then we deprive our potential buyers of the very funds they need to buy our goods.

Collapsing the dollar has all sorts of other pernicious side effects, too. What happens to the price of imported oil of the dollar is cut in half? It doubles. What effect will that have on the domestic U.S. economy?

Will all the nations pursuing an "export or die" strategy of national economic growth stand by idly while the dollar weakens and their own currencies are driven up to the point that Americans can no longer afford their goods?

Of course not; we are already witnessing a "race to tthe bottom" as every nation and trading bloc attempts to lower its currency to keep its flagging export machine running.

Even worse from the U.S. point of view, destroying the value of the dollar in an attempt to boost exports fails to take into account that the Chinese peg their renminbi to the dollar. So as the dollar drops, so does the renminbi (yuan). The net result is Chinese goods remain cheap to U.S. consumers regardless of how low the dollar goes.

2. Exports are around 6-7% of the U.S. economy. Even a stupendous 20% increase, as welcome as that would be, would register as a blip in the overall GDP.

3. The supply chain necessary to complex manufacturing has moved overseas. As theBusinessWeek article explains, getting a big fat tax credit for a new factory in the U.S. is only step one: you need a supply chain of components and partners. If that has migrated overseas, then you need to either outsource the overseas components (in which case why assemble anything here?) or re-invent a new supply chain here--an expensive and risky proposition.

4. Though Americans love to give lip service to manufacturing, local government and those living nearby don't like it; thay all want "clean industries" like making movies ($10 billion in a $14 trillion economy--good luck with that) or that wonderful FIRE economy (finance, insurance and real estate) which generates billions of dollars from nice clean office parks and towers.

Except when it doesn't.

5. Those touting manufacturing as a "jobs" engine must not have actually toured many factories. To compete globally, any new factory in the U.S. has to be heavily mechanized and automated. A typical factory might have a few dozen employees tending the robots and software. Even a large factory might employ fewer than 200 workers.

Pundits who talk about "manufacturing" should spend a day working in an old-fashioned assembly line (if any still exist in the U.S.), putting one part in the same place all day long. It is mind-numbing work and that aspect is always passed over in the bloodless cheerleading by those who have no idea how a semiconductor factory (for instance) actually functions.

Even in China, manufacturing is inevitably becoming more automated. That has been "the future" for decades and it remains the future.

6. The cost of doing business in the U.S. is prohibitve and getting more so with each passing day. Healthcare costs rise 6% every year, 25% every four years, regardless of whether Tweedledum or Tweedledee runs Washington or if the economy is growing or shrinking. Every level of government is a sclerotic bureaucracy which makes starting a business a costly, risk-laden challenge.

The prevailing attitude is that private enterprise's money "should" flow to government like water flows to the sea, and small business "should" soldier on, paying taxes and making payroll, regardless of how bad the economy gets or how onerous the junk fees and taxes become.

As I have long noted, small business (the engine of the economy) has a choice--it can opt out, quit, close its doors. The reasons to do so pile higher every day. Once again, Americans love to pontificate about how much they value small business, even as their governments make doing business a losing proposition.

For all these reasons, we should be wary of claims that the U.S. can "grow its way out of recession" on the back of a newly energized manufacturing/export sector and replace the failed "debt-based consumption" model of "growth" with a new one based on exports of manufacturing.

Tuesday, November 17, 2009

The hype is that the "recession is over." Has anyone touting this line actually walked around the real world? The next 7 million jobs to be lost are already in the pipeline.

The divergence between the reality easily observed in the real world and the heavily touted hype that "the recession is over because GDP rose 3.5%" is growing. It's obvious that another 7 million jobs which are currently hanging by threads will be slashed in the next year or two.

Total nonfarm payroll employment declined by 190,000 in October. In the most recent 3 months, job losses have averaged 188,000 per month, compared with losses averaging 357,000 during the prior 3 months. In contrast, losses averaged 645,000 per month from November 2008 to April 2009. Since December 2007, payroll employment has fallen by 7.3 million.

It is staggering that 7 million jobs lost out of 145 million (the total prior to the financial meltdown) has created a 10.2% unemployment rate. The numbers here don't add up--"only" 190,000 jobs were lost in October, but then employment fell by 589,000--huh?--but the point missing is how many jobs are hanging by a thread.

I recently traveled to Los Angeles to be interviewed by my polymath friend and media maven Richard Metzger, creator of the Dangerous Minds website which has rocketed to 50,000 page views a day since he launched it a few months ago. (The topic was of course Survival+; look for the interview in about a week on Dangerous Minds.)

(Richard also manages the L.A. Time's hot blog Brand X which will have you humming Randy Neuman's I Love L.A. in short order.)

Has anyone noticed that airports are commercial dead-zones peopled by zombie clerks suffering from terminal boredom?

One desperate young man had taken the unenviable job of hawking Chase credit cards via a weak pitch for a free ticket on Southwest Air (retail value $59). Since I like to arrive early for flights (perhaps scar-tissue remaining from being on TSA's "watch list" for months on end, and almost missing flights as a result--"papers, please!") I was able to observe hundreds of travelers stream by the young man's kiosk while he gamely voiced the pitch. Not one person even paused, much less stopped.

Translation: Up yours, Chase credit cards.

How many of these dead-zone airport retail kiosks will go dark next year?

The See's Candy kiosk: bored clerk rearranging pricey boxes of candy, no customers. Ditto the sunglasses kiosk, and every retail outlet except Starbucks, which was moving plain coffee and the pizza/beer establishment which did a brisk business around 7-8 p.m. with the "heading home Sunday evening" crowd.

(Richard and I had picked up some excellent Chicken Tikka Masala from a small indian market on Pico Blvd., so I wasn't tempted.)

I rented a brand-new 4-door Ford Focus--a nice car with plenty of zip--for $24 total, including all the ripoff airport and State of California taxes, with unlimited miles. $24 for all day, including all the new junk fees added to car rentals? Deal!

The red Mustang sat in the rental lot, a rather sad icon, while the cheapest compacts were rented and driven off the lot. What does that say?

Arriving early at the studio (natch), I had time to wander down one of the premiere open-air retail malls in the nation, the Promenade in Santa Monica (town of my birth, heh, though I never lived there). Other than one or two Asian tourists, no one carried a shopping bag of any size or type. This was noon on Sunday, a busy shopping day, and nobody was buying anything. Barney's Beanery was doing a good business but most other dining establishments were crypts.

Victoria's Secret was promoting 7 panties for $21--how much profit can VS rake in selling 7 panties for $21?--and the store was empty. Even the Apple store was a morgue.

Bored waiters were leaning on sidewalk cafe railings, and a few employees were sitting outside talking with their friends--tip-off--no drinks, no food, the table was bare.

OK, here's the money shot. Recall for a split second I am a writer (for better or worse) and so my "job" is to observe people closely (22 years free-lancing, man, am I dumb to keep doing this!).

So a tres-chic young Caucasian woman with two adorable kids around 7 to 9 years of age pauses a few yards from me. The woman has the casually tony attire and slim figure of someone who either is a well-educated professional pulling down major dollars or someone whose spouse is pulling down major dollars in some yuppie gig (or both spouses are doing so).

The yuppie Mom pulls her wallet out of her upscale little purse as the two kids gather round and I am thinking, "She's going to give each kid a Jackson ($20) or at least a fiver just to blow on whatever strikes their fancy."

This is, after all, Santa Monica on a Sunday, and this is a yuppie Mom with the bucks to pay for high-end casual attire, hair coloring, personal trainer, gym membership, etc.

After digging around a bit, she extracts two pennies which she gives to her kids to toss into the water feature/fountain nearby.

I think this rather neatly summarizes the entire U.S. consumer and the future of the economy.

Doesn't anyone follow the threads of what is easily observable anywhere in America?

Consider for a moment one of the few businesses licensed to print money--towing companies with city contracts. What are the odds that these towing outfits are towing cars which no one ever claims? Heck, with tickets, towing and storage fees, the cost of reclaiming your vehicle can run into the hundreds of dollars in a mere day or two.

That is more than many vehicles are worth. So what's the net result? the towing companies' lots will soon be filling with junkers and their revenues will be falling as down-and-out citizens abandon their vehicles because they don't have the money to get them un-impounded.

About once a month I take my Mom out to dinner in San Francisco, "the most European city in America" and a favorite city for those with disposable income. The city contains approximately three restaurants per resident (slight exaggeration) with a Michelin one-star establishment (i.e. excellent, superb, etc.) about every block in the better neighborhoods.

Yes, it is a splurge, but it's my Mom and it's our "quality time." So we chat with the waiters and waitresses, and on opera nights and the like, business is so good it seems impossible the word "recession" is even being bandied about.

But when it's slow, it's dead. It seems almost random, which nights are busy and which are slow, but the net result is far from random. A couple of places that we occasionally frequented a mere year ago are now dark.

A friend of ours has been trying to sell an investment house in a highly desirable zip code in a San Francisco Bay Area suburb. Built perhaps a decade ago, the house would have fetched $800,000 in a heartbeat in 2006, and our friend rejected an offer of $550,000 a year ago as absurdly low. This is after he spent a lot of money having the home repainted in and out, new cabinet doors installed, new carpeting, etc.

That was the only offer the property has received in over a year. Needless to say, maintaining the mortgage is killing him financially.

How many hundreds of thousands of families are in the same situation?

The Honolulu Symphony, which I enjoyed occasionally when I lived on Oahu, recently declared bankruptcy. How many other non-profit arts, theater and community groups are hanging by a thread? Hundreds, if not thousands.

Put together the anecdotal evidence and the next 7 million jobs to be lost are already in the pipeline. I could go on and on about the small businesses whose owners are preparing to close "if things don't pick up a big way soon" and all the other signs that a new wave of massive job losses is rising. But you know that already if you've walked around with your eyes open.

Monday, November 16, 2009

The trillions squandered on "stabilization" is not leading to "recovery" of the real economy; it is only life support keeping a sick economy from imploding. The stock market rally rests on rapidly crumbling sand.

I'm not saying the stock market will crash, only that if it had any relation to the real U.S. economy that it should crash, and soon.

The current politics of experience (a key concept in Survival+) is so warped by misleading statistics and orchestrated propaganda that it feels strange to state the obvious and find it is "that which cannot be spoken": the credit-dependent, consumer-dependent U.S. economy is going down, and going down hard, and the trillions of dollars borrowed and spent by the U.S. government and Federal Reserve to crank up a recovery have failed completely, utterly and totally.

The basic idea of Keynesian policy is simple: when the wheels fall off the private, quasi-free enterprise economy, then the government borrows and spreads mountains of money around like fertilizer which will stimulate "green shoots" of recovery.

The forgotten key to successful Keynesian policy is a government which has not been borrowing and spending trillions of dollars even during an era of so-called "prosperity." When a government like the U.S. has been propping up "prosperity" with trillions in borrowed money for a decade, then doubling or tripling the "stimulus" in the hopes that the green shoots will be enduring is truly farcical.

If the economy needed several trillion dollars in deficit spending to eke out the meager jobless growth of 2001-2007, then why does anyone think that doubling or tripling that deficit spending will create an enduring boom?

The truth is the U.S. economy has been dependent on Federal stimulus for years, both the indirect stimulus of artificially low interest rates and unlimited liquidity, and the direct spending of hundreds of billions of borrowed dollars.

Even before the financial crisis, the Federal government was borrowing and spending $400 billion a year to prop up "prosperity." All that spending simply papered over the rot at the core of the economy:

1. The primary support of the U.S. economy is consumer spending which is ultimately based on household income and assets.

Earned income has been flat to down for most Americans for years. The median income has been skewed upwards by the top 10% whose earnings have risen significantly. According to the Bureau of Economic Analysis, real disposable personal income-- income adjusted for inflation and taxes--declined 3.4 percent in the third quarter after increasing 3.8 percent in the second quarter.

In an economy dependent on consumer spending for 70% of GDP, how can GDP rise by 3.5% while personal income plummeted by 3.4%? Assuming that boost in GDP is real and not just statistical legerdemain, then where did it come from? From borrowed money, of course-- the Federal government borrowed and spent over $1.4 trillion in fiscal 2009.

In the good old days of 2002-2007, households would have borrowed and spent hundreds of billions as well. But the consumer, beset by declining assets ($13 trillion lost in the past two years), declining income (see above), falling housing values and worrisome employment trends (17% unemployment/underemployment, broadly measured), is actually cutting back on borrowing: Revolving Consumer Credit Drops 13.1% in August.

Consumer credit decreased at an annual rate of 5-3/4 percent in August 2009. Revolving credit (credit cards) decreased at an annual rate of 13 percent, and nonrevolving credit decreased at an annual rate of 1-1/2 percent--the longest decline in consumer debt since 1991.

So while households are still burdened with almost $2.5 trillion credit card and nonrevolving debt (auto loans, etc.), they are paying debt down, not adding more.

And let's not forget that homeowners pulled out about $5 trillion in home equity in 2001-2007, and the home equity ATM is closed for good. That brings us to:

2. The primary asset in most U.S. households is a home, and home values are still dropping, foreclosures are still rising and the only force keeping the market from falling faster is the Federal government's defacto nationalization of the entire U.S. mortgage market.

Of the $1.5 trillion mortgage securities issued in 2009, a mere 1% ($15 billion) have been issued by banks; 99% are backed by the government. The government owns over half the nation's $10 trillion in mortgages via its defacto ownership of Fannie Mae and Freddie Mac, and it has guaranteed virtually all the mortgages originated in the past year via FHA or VA.

The residential mortgage market is now effectively owned lock, stock and barrel by the Federal government and its private "central bank", the Federal Reserve.

Should the Fed and Treasury reduce their subsidies (that wonderful $8,000 giveaway tax credit to new home buyers or anyone claiming to be one), guarantees and outright purchases of mortgages ($1.2 trillion this year alone), then the mortgage market would instantly freeze up or start pricing in the very real risk that housing is not "recovering" and that anyone holding a mortgage could suffer huge losses if real estate continues declining in value.

Here are a few charts to ponder:

Credit Creaks into Gear: With a big boost from the feds, investors again like securities backed by assets like car loans—but it'll take years for lending to flow freely.

3. So how have companies "surprised" with higher profits? By slashing payrolls, R&D and various accounting tricks. Actual revenue growth is missing in action. So how do you keep "surprising to the upside" after you've slashed headcount, burned R&D and turned every accounting trick in the book?

The GDP Mirage By overlooking cuts in research and development, product design, and worker training, GDP is greatly overstating the economy's strength

You don't. A stock market rising on the hopes of an actual, real, tangible recovery in household income, home equity and creditworthiness is seeing mirages and hallucinating that the lake just ahead is deep and wonderful and stretches to the horizon.

Only we never reach the "lake," do we? "Stabilization" is a chimera; the reality is the government is propping up the economy via unprecedented borrowing and spending, and there is absolutely no evidence that private capital, credit or spending are rising from the "stabilization."

We are walking through the desert, kept alive by the sugar-water drip of Federal stimulus, guarantees and subsidies. The "so near, yet so far" mirage of "recovery" has been propping up the stock market for nine months, and when a slight breeze blows away the thermal illusion, then the market will crash back to the March lows, or perhaps even lower. That crash will simply reflect the state of the real economy.

Saturday, November 14, 2009

Chris Sullins, who recently published his Strategic Action Thriller Operation SERF, finally found time to compose a new essay. The long drought of new Readers Journal essays has finally been broken--thank you, Chris.

Iron Sharpens Iron by Chris Sullins

I have to admit I’m one of those people who make mental notes of who is doing what as they drive through the neighborhood. It’s not that I know the people and am looking for some kind of juicy gossip to pass along in a later conversation with an interested third party. I often keep most of this seemingly superfluous data inside of my own head unless I bring it up as comment to an immediate family member.

Most people really wouldn’t care about how much wood the Smiths have stacked up, how many people the Browns have hunting on their land, or that the house the Jones family moved away from still has a for sale sign out front a year later. For the most part this activity of storing and recalling my real life observations is only a form of mental exercise. Like running and weightlifting for my physical body, this is a simple way to keep my episodic memory in shape through regular practice.

As with most data there can be consequences with the unintended release and reinterpretation of it by other people. This happened over the summer when one of my children saw one of our neighbors and commented out loud “Mow to live, live to mow.” I asked what she meant by that and she replied “That’s what you said to mommy the last time you saw that person mowing.” This reply was enough to cue my memory of a conversation I had with my wife a few weeks earlier.

I recalled I had seen this person cutting his grass at least twice a week over the summer and that even on rainy cloud-filled days the underground sprinkler system was watering his lawn twice per day. I had said to my wife that this person would only have to mow once per week “at most” if he reduced watering his lawn to no more than every other day. I also noted the summer weather had been unusually cool and rainy compared to the previous decades I remembered. In the summer of 2009 the local vegetation had done well and presented beautiful shades of green over the entire summer given only our cloud-based precipitation.

I had stated to my wife this neighbor wasn’t the only person who did the extra watering and mowing in our area. I had noticed other nearby homes had sprinklers running each day. A similar ritual followed at least twice per week as someone would ride atop a lawnmower as the sun set in the cool evening. I said something to the effect that these people spent all their leisure time on their lawn mowers and added “They mow to live, live to mow.”

I expressed my observation that the grass in the yards of the recently abandoned and defaulted-back-to-the-bank homes only grew enough to require cutting once every two weeks, were never watered and didn’t turn brown once the entire summer. I wondered out loud to my wife if the people who were watering daily and mowing twice per week would still be doing so if they paid for water by the gallon of if the price of gasoline had remained as high as it had been in the summer of 2008.

As with most of our conversations regarding my innocuous data collection, my wife nodded a few times and commented on a point she agreed with in this case: gasoline was indeed expensive last summer. Much to the benefit of our continued marital bliss that day, I had avoided bringing up anything to do with politics or religion. For the reader I’ll leave my tangential thoughts on the attraction of opposites and how to balance the extreme difference in gravity between the human male and female for a later essay.

Readers of my earlier essays are familiar with my tendency to make personal observations peppered with some historical asides before skipping over to address current global concepts which currently affect us all. Like a common law couple, war and economics are inseparable partners on the world stage and I have no problem being one of the many political paparazzi who follow them. During this pursuit I often try to illuminate some sort of unintended consequences of mankind’s artificial systems.

Combine the over-reach of the financial Plutocracy ("our contributions to Congress are too big to fail!") with the over-reach of the State ("criminalizing poverty is our game") and you get a Plantation society of debt-serfs ruled by an Elite which holds monopolies on "authorized" violence and theft.

Our first example is from correspondent M.J.:

Yesterday was my day to realize we are now living in a fascist country.

I received no less than four calls from the local (LAUSD) district threatening me to stop homeschooling my son and to drop him off at the local illegal alien dropout school. I tried to explain to the bureaucrat that I had no choice but to pull him out of the public schools because he is two grade levels ahead and needs private tutoring (I hired a licensed former teacher and someone with a masters degree in math to tutor him), and that I would be happy to have the school district test him and put him in an accelerated or gifted program.

She had nothing to offer me, couldn't care less about his academic needs, said she didn't know of any gifted programs offered by the school district, wasn't particularly interested in testing him, and just threatened me that I'm breaking the law and I said I had to put him in my local school, which I told her was impossible because it's a low-income poorly performing school that could not possibly accommodate my boy. Over my dead body were the words I used, actually.

In case you are wondering how she found out I was homeschooling, it all started when we lotteried into a charter school in a wealthy neighborhood near Santa Monica and I ended up having to pull my son out because they use the same mediocre curriculum as every other LAUSD school.

Then I got home and got a letter from the IRS that they "segregated" (seized) 19K from my bank account because I owe 6K in alternative minimum tax. My husband did our taxes and I guess he missed the fact that we owe this on top of all the money they take out of his paycheck.

I am so fed up, I don't even recognize this country anymore.

The next example is provided by correspondent Lawrence:

Just came from another blog reading about Suzette Kelo, who lost her home in the infamous Kelo eminent domain case. After her house was torn down, the development was canceled, and all that remains is a weed and trash filled lot.

"In October of 1992, millionaire recluse Donald Scott and his bride of two months, Frances Plante Scott, lived in a storybook wooded valley in the mountains high above Malibu, Calif. Trails End Ranch is almost completely surrounded by state and Federal park land, and the neighboring government entities had made numerous attempts to buy out Scott and annex his property.

Stymied in their attempt to buy the Scott ranch, government officials hit on an alternative plan. Contending an officer had seen "marijuana plants growing under the trees" during a drug-seeking overflight, agents from various jurisdictions gathered quietly outside the locked gate to the ranch in the morning mists of Oct. 2, 1992. After greedily studying the maps of the 200 acres of prime land they were told they'd be able to grab under federal asset seizure laws should they find as few as 14 marijuana plants, they cut the chain on the gate with bolt-cutters and raced a mile up the dirt drive to the ranch, complete with police dogs.

Frances Scott was in the kitchen, brewing her morning coffee, when dozens of men in plainclothes and brandishing guns -- no badges or warrants in evidence -- came swarming in. Understandably, she screamed for her husband, still asleep upstairs.

Donald Scott, 63, came hurrying down the stairs, a handgun held over his head. The officers shouted for him to lower his weapon. He did. They shot him dead."

Your government in action. I hope you approve. The irony of tragedies like this is that when young Americans faced similar "law enforcement" tactics in the late 1960s and early 1970s via COINTELPRO and other blatant violations of constitutional rights, we were written off as radical hippies who were a threat to something (certainly not democracy, but "something." Like perhaps an illegal war and an out-of-control secret government?)

Now that average citizens are facing similar tactics, they might find it interesting to study the COINTELPRO campaign of the FBI and other "law enforcement" officials against the anti-Vietnam War movement three decades ago.

According to attorney Brian Glick in his book War at Home, the FBI used four main methods during COINTELPRO:

1. Infiltration: Agents and informers did not merely spy on political activists. Their main purpose was to discredit and disrupt. Their very presence served to undermine trust and scare off potential supporters. The FBI and police exploited this fear to smear genuine activists as agents.

2. Psychological Warfare From the Outside: The FBI and police used a myriad of other "dirty tricks" to undermine progressive movements. They planted false media stories and published bogus leaflets and other publications in the name of targeted groups. They forged correspondence, sent anonymous letters, and made anonymous telephone calls. They spread misinformation about meetings and events, set up pseudo movement groups run by government agents, and manipulated or strong-armed parents, employers, landlords, school officials and others to cause trouble for activists.

3. Harassment Through the Legal System: The FBI and police abused the legal system to harass dissidents and make them appear to be criminals. Officers of the law gave perjured testimony and presented fabricated evidence as a pretext for false arrests and wrongful imprisonment. They discriminatorily enforced tax laws and other government regulations and used conspicuous surveillance, "investigative" interviews, and grand jury subpoenas in an effort to intimidate activists and silence their supporters.

4. Extralegal Force and Violence: The FBI conspired with local police departments to threaten dissidents; to conduct illegal break-ins in order to search dissident homes; and to commit vandalism, assaults, beatings and assassinations. The object was to frighten, or eliminate, dissidents and disrupt their movements.

Same old, same old, only now the name of the game for State over-reach at the local level is all about generating cash, via traffic fines and "theft by other means."

Declaring the collapse of the U.S. "healthcare" system to be inevitable is akin to declaring the insolvency of the Federal government to be inevitable: unthinkable. Yet both statements are equally true.

The financial impossibility of increasing "healthcare" costs at 6-7% per year in an economy which grows at best 2% (assuming the GDP numbers have any accuracy at all, which is doubtful) is clear; at some point in the near future, the entire GDP of the nation would have to be devoted to "healthcare."

But the system is completely unstable on non-financial levels as well. The entire "employer pays the costs" model is hopelessly divergent from the realities of global wage/benefit arbitrage--the more costs you dump on employers, the more jobs they cut or move offshore-- and the "sickcare for profit" model is intrinsically at odds with the goal of wellness (wellness is unprofitable, managing chronic illness is highly profitable).

Lastly, both the insured and those receiving free Medicaid are totally detached from the cost of their care, and thus from responsibility and choice--the two key features of an adult understanding and response to complex issues.

We turn to correspondent C.P. for a first-hand report on the pervasive sickness of the opaque sickcare system:

I want to commend you for your excellent commentary on healthcare reform. I couldn't agree more and as a former medical scientist I used to have a front row seat, observing in nausea and disbelief the cronyism, horrific waste, ineptness, and outright corruption. The most egregious example being my supervisor's use of our facility and his credentials as the institution's vice president and dean of the medical school to test experimental drugs synthesized by a biotech company he co-owned and held an executive position at.

The vast majority of the funding for the research came from federal grants.

About 8 years ago, in order to make sense of the escalating madness around me and a deep concern that the system was teetering on collapse, I enrolled in a public health and preventive medicine graduate program hoping to participate in a debate on true reform and as a advocate for wellness and prevention rather than the current sickcare paradigm.

To my horror, the program didn't address the core problems and, instead, appeared to be operating as an indoctrination tool for the kind of "reform" recently shoved through Congress. I confronted these issues as best I could during my seminar presentations.

Unfortunately, most docs and researchers were too busy, self-absorbed, or simply brain-washed to appreciate the value of a sustainable alternative to the status quo.

I hit the ejector seat button and my budding career ended. I may be financially poorer for that decision but I'm much more content and intellectually richer in so many ways (and so grateful to have found brilliant writers/thinkers such as yourself!).

BTW, did you happen to read the recent NY Times article on Suzanne Stratton's battle with Carle Cancer Center administrators? In several ways, the errors and cover-ups described in the article are very likely the tip of the iceberg. As the system becomes increasingly opaque, our best bet will be to help educate the public how to be proactive, medically informed self-advocates.

Thank you, C.P., for this report. The people struggling to provide care in such a profoundly contradictory system face unresolvable double-binds. As C.P. notes, they experience an intense indoctrination akin to brainwashing that "this is the best healthcare system in the world" even as they see on a daily basis how the system fails the patients, the caregivers and thus the nation itself.

Frequent contributor Kevin M. (proprietor of the Out of Your Rut blog) questions the system's implicit assumptions made about cures, care and the process of healing:

People get lost in the minutiae of the issue, converting it to a debate that needs to be won, rather than a crisis that needs to be solved. Personally, I think most find the truth to be too disturbing to confront, and somehow find comfort in the details and debates. No matter, that approach will get us nowhere.

This is just my own take on healthcare in general, but while acknowledging that modern medicine has made great strides, we have to wonder if there isn't a large dose of snake oil being peddled too. The failure rate of various treatments have to make them suspect at the very minimum.

Is it possible that a large part of the "cure" that healthcare offers is really nothing more than the hope or belief that a given regimen is or will be successful? Various studies have shown that people of faith live longer and have greater survival rates than those who have no faith--the catch is that faith isn't restricted to one specific belief set. Could it be that many people are cured merely because they have faith that the doctor, medications, surgeries, system, etc, is saving them, and that's the driving force behind many recoveries? As long as they stay on a given therapy, or have hope that another will be offered for what ever may go wrong with them, their faith remains intact, and the power of the mind--not so much the threrapy--is what actually produces the cure.

I believe this may be true for millions of elderly, who are on multiple drug therapies and have a virtual umbilical cord to the healthcare system. Many have seen their bodies deteriorate well past the point of functionality, but something keeps them alive. That something may be their own minds and the faith they have in the healthcare system to save them, rather than the system itself.

At one level, we can see benefit to such a collective placebo affect; the problem is in it's enormous and unrestricted cost.

I'm with you that well-care will be the key to any program coming down the pike, and until it becomes the driving force of healthcare, any program we can hatch will be little more than reshuffling the deck.

Thank you, Kevin. Providing well-care is not what the present system is designed to do or incentivized to do; therefore it is incapable of doing so.

I think the model of vast Federal bureaucracies solving every citizen's problems is inherently insolvent and irredeemably broken. Well-care will have to come from a wellspring of individual responsibility and small-scale community effort, not some gigantic institutional machine which stripmines the entire economy to feed its voracious and insatiable appetite for more money to fund a crazymaking jumble of completely perverse incentives.

Wellness requires an integrated understanding of the oneness of food, diet, fitness, physical and mental health and the culture which sustains or erodes this understanding; without this full-spectrum understanding, then well-care will remain forever beyond reach.

Wednesday, November 11, 2009

The global central banks have flooded the world economy with hot money for years. Why has this created massive asset bubbles rather than inflation?

In the 1970s, expanding credit triggered a decade-long bout of high inflation as cheap money chased scarce goods. Why hasn't the massive expansion of credit/hot money of the past decade caused inflation? Short answer: overcapacity.

Let's look at a few charts to recall the enormity of the current credit bubble: the trillions of dollars of credit created, the trillions borrowed in mortgages and other credit to chase asset prices upward, the trillions created as assets like housing rose in bubblicious euphoria, and the trillions extracted from those skyrocketing assets:

Despite the trillions being created, borrowed and pumped into the economy, inflation remained benign:

With all that money flowing around, jobs were relatively plentiful, setting a floor under consumption and consumer credit:

Even as all this money chased goods, services and assets, interest rates fell, earning savers less and less return:

Meanwhile, the capacity to make stuff like steel exploded:

So here's the dynamic which enabled low interest rates and low inflation even as credit exploded and bubbles rose in one asset class after another.

1. Massive expansion of credit was paralleled by a massive expansion of industrial capacity in China and indeed the entire world.

2. This expansion of capacity was matched by an expansion of supply in commodities. As the industrialization of China (one of the so-called BRIC nations--China, Russia, India and Brazil) and other developing nations drove demand for commodities, the incentives to exploit new sources drove up supply of almost everything: oil, iron ore, coffee, etc.

3. While prices have fluctuated in an upward bias, at no time did the cost of commodities rise to levels which threatened global growth except for the oil spike in 2008. Adjusted for inflation, oil is well within historical boundaries even at $80/barrel.

4. To feed the giant credit-dependent machine they'd fostered, central banks kept lowering interest rates and increasing liquidity/money supply. This drove the returns on savings and bonds down to absurdly low levels, forcing money managers to chase riskier assets to make a decent return on investments.

5. This need to earn higher returns drove vast floods of money into assets, inflating one bubble after another.

6. Though consumption also skyrocketed, the vast expansion of industrial capacity and commodity supplies actually outpaced rising consumption, keeping supply and demand more or less in balance and prices relatively stable.

In essence, the hot money was forced to chase assets for higher returns while China's capacity to make goods matched and then exceeded global demand for goods.

The only way credit can drive inflation is if the supply of desired goods is limited. Many of us foresee a time when oil will be that commodity which is no longer able to match demand, but for now, the rise of production in Russia, Africa and elsewhere has kept pace with (now slackening) demand. Indeed, we might well see demand fall enough as the global recession takes hold that oil will fall to $30/barrel.

China's capacity to produce goods now exceeds global demand. Add in the rest of the world's enormous overcapacity and you get deflation, not inflation.In one industry after another, massive overcapacity is the stark reality. For example, the world can manufacture twice as many vehicles as there are customers for those vehicles.

The two key exceptions are grain and oil. If grain supply doesn't match demand, and reserves have been drawn down, then prices could rise suddenly.

At some point oil supply will fall below demand, but when that point will occur is unknown.

Until either or both grain and oil fall into scarcity, then inflation in goods and services has no foundation. As long as interest rates remain near-zero, then the pressure to borrow money and chase asset prices higher remains in force.

No trend lasts forever. At some point interest rates will rise, risky assets will fall from favor and global scarcity in key resources will arise.

How long can the central banks inflate the exponentially-expanding credit bubble? No one knows, but we can say the end-point will arrive when no one wants to borrow more money even at zero interest rates.

Tuesday, November 10, 2009

The Elites of the Savior State are making up their declining tax revenues via grabbing private property under the guise of "punishing criminals." Sounds good until the criminal is you and your crime was unpaid traffic fines.

One key feature of Third World Kleptocracies/Police States is illegal search and seizure. Read the story below for an example on American soil. The propaganda is that "rogue elements" are to blame (naturally) but the reality is that the State (central government) has increasingly extended its kleptocratic powers to seize private property essentially at whim.

As noted in my entries linked below, "unpaid traffic fines" can be grounds for seizure in some locales.

Under RICO, a person who is a member of an enterprise that has committed any two of 35 crimes-- 27 federal crimes and 8 state crimes--within a 10-year period can be charged with racketeering. Those found guilty of racketeering can be fined up to $250,000 and/or sentenced to 20 years in prison per racketeering count. In addition, the racketeer must forfeit all ill-gotten gains and interest in any business gained through a pattern of "racketeering activity."

RICO also permits a private individual harmed by the actions of such an enterprise to file a civil suit; if successful, the individual can collect treble damages.

The entire concept was intended as a weapon against organized crime. With RICO, a criminal gang which had extorted millions of dollars and purchased property with the money would find the property seized, and those who had been extorted could file claims against the gangsters.

So far so good--the State steps in to protect "the little guy" from parasitic criminal gangs.

But that original intent has slipped the bounds of justice and democracy, and now local governments and authorities feel free to seize property for an absurd range of "crimes" which have nothing to do with large, secretive, extremely wealthy organized crime gangs.

Here is the context for the discussion:

Og my gosh, we're short of money here! Go stripmine some citizens with no power or political juice. And make it snappy!

Correspondent David C. reports on the outrageous abuse of search and seizure in Minnesota.

On a related subject, here in Minnesota we've had some big problems with corrupt cops. The Metro Gang Strike Force was created to go after criminal gangs, but ironically this year we found out that they were a criminal gang! The police were taking property and cash for personal use or to fund the strikeforce after budget cuts.

After hearing hours of testimony Thursday about how state forfeiture laws are supposed to work, many legislators had vanished by the time two citizens spoke of their problems after police seized their property.

One of them was Terrance Frelix Sr., 34, of Minneapolis. He and a business partner owned some properties and were running behind on a mortgage in 2006, Frelix testified at a hearing. His partner borrowed $4,000 and had just given Frelix the money when a Metro Gang Strike Force officer took them in for questioning.

Police released them without charging them with a crime. The strike force later informed Frelix they were forfeiting the cash and Frelix's truck.

Frelix had been outside his vehicle when police swooped in and — unbeknownst to him, he said — a relative was smoking a marijuana joint inside. Police said the small amount of marijuana was the reason they were forfeiting the property.

Frelix went to court but hasn't gotten his property back. He said he's still out the $4,000, plus $3,500 in attorney's fees. His truck is gone, along with the property management equipment inside.

"Even to this day, I'm still frustrated," he said after Thursday's hearing.

Earlier in the hearing, legislators had been walked through flow charts and other documents explaining how the state's forfeiture laws work.

After hearing Frelix's account, Sen. Ron Latz, DFL-St. Louis Park, said the information about what was happening on the streets was"nowhere near what happens on the flow chart." Thursday marked the fourth joint legislative committee hearing held in the wake of the Metro Gang Strike Force's demise.

An independent review of the now-defunct strike force, released in August, found some officers seized money and property from people never accused of a crime, then took the property for personal use. The FBI is investigating.

David C. commentary continued:

A State law allows the police to seize property from suspects without getting a warrant and without charging them with a crime. This seems very unfair to me if not unconstitutional, what happened to the Fourth amendment?

Also, people challenging seizures in civil court waive protections against self-incrimination, exposing themselves to charges. One guy lost his house even though he wasn't charged with a crime! Gang Force seizures prompt look at law: A defense lawyer points to unfairness, potential for abuse at legislative hearing prompted by Metro Gang Strike Force actions

A state law allowing police acting on their own to seize property from suspects -- often without getting warrants -- is unfair and should be overhauled, defense attorneys told legislators Thursday.

"This creates a potential for abuse," said lawyer Howard Bass. "There's no checks and balances."

Bass said the government should have to prove the property was related to a crime and deserved to be seized. Currently, property can be forfeited in an administrative procedure unless the owner demands a court hearing within 60 days of its seizure.

And the court process is complicated. Property owners need to serve proper notice on the police agency and follow court rules of civil procedure and discovery.

Sometimes people who have not been charged with a crime don't challenge seizures because it would cost more in attorney fees than the property is worth, said Tom Plunkett, an attorney with the Minnesota Association of Criminal Defense Lawyers.

Adrian Ramiraz testified that the Strike Force seized his house in Crystal in 2008, though he, too, wasn't charged. He said he hasn't been able to recover it.

David C. commentary continued:

Perhaps in the future you may want to write about declining tax base and how government uses seizures primarily to fund itself instead of fighting crime. It seems to me that the police shouldn't be allowed to seize things as this corrupts their mission of fighting crime to going after money. Allowing a judge to order seizures would be better, but then one could also argue that even this is unfair if there are two drug dealers and their cars are seized and one car is worth $50,000 and the other one worth $10,000, one could argue that they got unequal punishment.

Thank you, David, for bringing a critically important issue to our attention. We might ask how did seizure of property become construed as the State's right, justified under the broad justification of "punishment"? Since when did smoking a $4 marijuana cigarette become grounds for seizure of $4,000 of private property which is essential to one's livelihood (a truck)?

I have sympathy for working-class stiffs who typically bear the brunt of these "legal extortions" by Kleptocratic States Masquerading as Democracies. I have worked in everything from construction to plantations to quantitative stock market research in my 40+ years of labor, and many of the guys I hired in my building days had served time for absurd drug convictions. One very sweet-natured young man with Native American blood had served time for manslaughter because he happened to be on the premises where a buddy of his OD'ed on smack and Lord-know-what.

Unless you've been protected from streetside reality, you know how it works:the upper-middle class kid (son of an attorney, local business magnate, politico, etc.) gets busted for possession or maybe even low-level dealing. His Dad shows up with big legal firepower and springs him from jail. Charges are either dropped or downgraded to misdemeanor charges so they can be expunged from the record after a few months of probation. The rich kid's car is not seized because there would be Heck to pay.

The experience of the working-class kid is entirely different. For all intents and purposes, he resides in a Third World police state in which authorities have few limits. The non-"fortunate son" kid finds himself in jail and no one to spring for bail, and he's facing felony charges with a long prison sentence.

The D.A. smells an easy felony conviction which looks good on his/her record so a trumped-up plea bargain is presented--we'll cut your sentence to "only" X years if you rat out your pals, etc. The poor kid's cash and beater vehicle are seized, and he serves hard time for a "crime" which earned the rich kid a few uncomfortable hours in jail and court, and a wrist-slap probation.

If I sound bitter, it's because I am. I have plenty of cops in my family and circle of friends, and it's usually not the cops--it's the system. One young man who worked for me got busted on some trumped-up "dealing" charge and his response was to push his car up to 90 miles an hour on a deserted road and then drive off a cliff. He died rather than do long jail time for a trivial "crime" a rich kid would have skated past in one meeting with The Powers That Be.

Just as ominously, correspondent J.P.B. reports that private firms with State-approved authority are wielding Police State technology and tactics to pursue their "job" of repossessing vehicles.

Wanted to give you an update corollary. In today's Columbus DispatchBusiness section, page D6, is an article "Repossessions slowing down, but agents adapt." It is a wire article picked up from the Chicago Tribune, and it discusses repo men using optical character recogniton cameras to read license plates and store the info in a database. Very interesting.

Indeed. The State's strategy is clear: criminalize all sorts of behaviors like not paying traffic fines and then use that "criminality" as the phony justification for illegal search and seizure.

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